Licensing
How do royalty audits work?
The short answer
Your license's audit clause lets an accountant inspect the licensee's books to verify royalty reports — typically once a year, sometimes with a 'true-up' trigger when underpayment exceeds a threshold. It's not paranoid, it's standard: the royalty benchmarks everyone relies on are themselves sourced from SEC filings, because even public numbers need checking.
The full picture
The mechanics: you (or your accountant) give notice, review sales records and royalty calculations, and reconcile against payments. Well-drafted clauses make the licensee pay for the audit if underpayment exceeds a negotiated threshold — often 5%. Underreporting is common enough that audit recoveries are a recognized revenue line for active licensors.
Without an audit clause, you're trusting the counterparty's spreadsheet forever — and licensees make honest mistakes in their own favor with remarkable consistency. If you're negotiating a license, audit rights are non-negotiable; if you already have a license and have never audited, the first one frequently pays for the whole exercise. It's one of the quieter things we encourage every licensor to schedule.
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Related questions
General information for patent owners — not legal advice. Read the disclaimer.